SEC Adopts Pay Ratio Rule Over Strong Dissents

The SEC adopted a controversial pay ratio disclosure rule last week in a 3-2 vote. The rule, mandated by Dodd-Frank, will require public companies to disclose the ratio of the annual total compensation of its CEO to the median annual total compensation of the company’s employees. According to the SEC release, the rule “will provide shareholders with information they can use to evaluate a CEO’s compensation, and will require disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure.” Chair Mary Jo White said that “[t]he Commission adopted a carefully calibrated pay ratio disclosure rule that carries out a statutory mandate,” and that “[t]he rule provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements.”

Dissenting Commissioner Dan Gallagher took aim at what he called “a nakedly political rule that hijacks the SEC’s disclosure regime to once again effect social change desired by ideologues and special interest groups.” Similarly, Commissioner Michael Piwowar argued that the rule “implements a provision of the highly partisan Dodd-Frank Act that pandered to politically-connected special interest groups and, independent of the Act, could not stand on its own merits.” Piwowar decried the rulemaking as unfair meddling at the behest of “Big Labor” and suggested that the rule “unfairly targets publicly-traded companies that employ a large number of individuals in states with relatively lower costs of living.” While CEO pay is based on supply and demand, “cost of living and local labor market conditions often play bigger factors in setting compensation for other employees.”

Gallagher suggested that the Commission should have completed more pressing rulemakings and projects, including transfer agent rule reform, equity market structure review, and Dodd-Frank required swaps rulemakings and rules related to securities lending transparency. Gallagher noted that the deadline for several other required rulemakings had already passed, whereas the pay ratio rule which did not have a statutory deadline.

Taking issue with the costs of the rule, Gallagher argued that implementation costs for the rule could have been reduced by $788 million had the Commission more narrowly defined “all employees” for the purpose of the rule to include only U.S. full-time employees. Instead, Gallagher asserted that the Commission relied heavily on its view of congressional intent, despite that the fact that “neither the law nor the legislative history at any point identifies the purpose of the rule, what it means by ‘all employees,’ or what benefits the rule would achieve.” Gallagher also questioned the benefits of the rule, arguing that the “additional immaterial information obscures material information” about executive compensation that is already available to investors. Piwowar suggested that “the adopting release defensively retreats to the rationalization that Congress directed us to promulgate the rule and, therefore, must have believed there was some benefit to a pay ratio disclosure; thus the Commission should refrain from second-guessing that judgment.”

The U.S. Chamber of Commerce released a statement that “pay ratio is a misleading, politically-inspired, and costly disclosure that fails to provide investors with useful, comparable data.” The Chamber suggested that it would “explore our options for how best to clean up the mess it has created.” Additionally, in a statement released after the rule’s adoption, Representative Jeb Hensarling, Chair of the House Financial Services Committee, said that the committee would consider a bill to repeal the underlying provision of Dodd Frank that required the rule and nullify the rule itself. The bill currently has 23 co-sponsors.